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Technology Stocks

Motorola Solutions Inc. (NYSE: MSI) Increases Guidance Following Strong Quarter, Meeting Prior Expectations; $175 FVE

Our $175 fair value estimate for Motorola is unchanged, as the new outlook aligns with our previous above-guidance expectations for fiscal 2022. We’re also pleased to see continued growth for the firm’s software and services segment, and continue to believe a heavier software mix will drive margin expansion for Motorola through 2025.

Motorola is benefiting from looser security budgets as the U.S. economy rebounds from 2020, and think it will see multi-year demand as state and local governments digest funds from U.S. government stimulus during the pandemic. Still, we think of Motorola as a steady grower, and think the market is painting a more rapid sales growth and margin expansion picture than is reasonable. We currently view shares as overvalued, and would recommend waiting for a pullback to invest. Management commented on its acquisition of Open path that occurred after quarter-end. The $297 million acquisition gives Motorola a stronger position in access control, which is quickly becoming a greater portion of its video segment.

Second-quarter revenue grew 22% year over year to $1.97 billion–2% higher than the top end of quarterly guidance– behind broad-based strength. Motorola’s video business posted 66% annual growth, which we think is resulting from strong market share gains against Axon in the body cam market. Non-GAAP operating margin of 24.5% grew 230 basis points year over year and 130 basis points sequentially, mainly behind higher sales volume and a greater mix of video and command center revenue.

Company’s Future Outlook

It is estimate these to continue increasing as part of Motorola’s mix, and think margin expansion should continue. We maintain our forecast for non-GAAP operating margin to expand 500 basis points through 2025. Command center software lagged the firm’s overall growth profile, but we think it’s primed for an inflection point with the full Command Central suite launching during the quarter, which we expect to augment switching costs a customers over time.

Company Profile

Motorola Solutions Inc (NYSE: MSI) is a leading provider of communications and analytics, primarily serving public safety departments as well as schools, hospitals, and businesses. The bulk of the firm’s revenue comes from sales of land mobile radios and radio network infrastructure, but the firm also sells surveillance equipment and dispatch software. Seventy-five percent of Motorola’s revenue comes from government agencies, while 25% comes from its commercial customers. Motorola has customers in over 100 countries and in every state in the United States.

(Source: Morningstar)

General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

Zurich Australian Property Securities Fund

Our Opinion

Our rating is based on the following key drivers:

Experienced Portfolio Managers (PMs)

The Fund is led by Carlos Cocaro and Damien Barrack of Renaissance Property Securities Pty Ltd. The two principals have worked together for over 18 years, specialising in ASX listed property securities and have a combined total of over 45 years of experience in analysing and investing in listed property securities. Whilst one may criticize the size of the investment team, in our view, the size of the team and credentials are appropriate considering the small universe (relative to other investment classes).

Disciplined investment process

The Fund uses a rigorous investment process with the Managers employing an active, value-based investment style, characterised by incorporating bottom-up investment research into individual securities, with a particular focus on analysing and forecasting the present and potential future income generation of each underlying property investment.

Solid absolute performance but relative underperformance

Although past performance is not an indicator for future performance, it is an indicator of whether the Fund’s strategy has worked in the past. Although the Fund has performed well on an absolute basis, the Fund has now underperformed relative to its benchmark by up to 3.5% p.a. (3 years performance numbers) and a marginal -0.65%, since inception; This is surprising considering, the Fund’s active risks is minimised, with low tracking error and the PMs being very benchmark aware. Indeed, with the idea that the Managers are very benchmark aware and the Funds beta close to 1.0, over the longer term, investors are by and large taking a view of the S&P/ASX300 Property Trusts Accumulation Index (rather than whether a passive or active manager is best).

Downside Risks

Deterioration in Australian economy especially the property market (deterioration of property prices and fundamentals).

The Portfolio Manager/analysts miss-calculate their bottom-up valuation.

Softening in bond yields negatively impacting pricing.

Key-person risk in Mr. Cocaro and Mr. Barrack.

Our Opinion…

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General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

Perpetual Smaller Companies Fund

Our Opinion

Highly competent PM

The PM, Jack Collopy has extensive experience and track record as an analyst and fund manager, with 21 years industry experience and 19 years with Perpetual. Mr. Collopy is supported by the wider Perpetual team of analysts, including deputy PM of the Fund Alex Patten. 

Constant rotation/changes at the PM level are a disappointment

 The constant rotation/changes at the PM or co-PM level in the last three years, for the Fund is a disappointment – we note that Mr. Collopy had transition to oversee other Perpetual strategies, leaving then co-PM Mr. Nathan Hughes to oversee the Fund. Mr. Hughes has since transitioned to become PM of Perpetual’s Ethical SRI Fund as of April 2019 (taking over from Mr. Collopy for that Fund). The Fund is now managed by Mr. Collopy with Alex Patten as deputy PM, who we think highly of, and have strong credentials and long investment experience. However, a period of stability at the PM level would give us more comfort before upgrading our recommendation.

Well-resourced investment team

Whilst the team managing the Fund is on the smaller end (relative to peers), the PMs of the Fund is able to tap into the expertise of the wider Perpetual investment team. The investment team is headed by Paul Skamvougeras, Head of Equities, and comprises a large and experienced team of Portfolio Managers (5), head of proprietary research (1), Deputy Portfolio Managers (3), Analysts (6) and the Responsible Investments team (2). Each Portfolio Manager is supported by the team of analysts and back-up procedures are shared throughout the large team. Jack Collopy is the Portfolio Manager of the Perpetual Smaller Companies Fund, with Alex Patten the Deputy Portfolio Manager. As such, ultimate investment responsibility rests with them. Mr. Collopy and Mr. Patten report directly to Paul Skamvougeras.

Solid investment process backed by bottom-up research 

The investment process is a bottom-up selection approach focused on quality and valuation, driven by research and engagement with management, which we think is particularly valuable in valuing smaller companies.

Downside Risks

Australian economic conditions deteriorate. 

The Portfolio Manager/analysts miss-calculate their bottom-up valuation.

Departure of key PM Jack Collopy or Deputy PM Alex Patten.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Cushman & Wakefield (NYSE: CWK) Reports Solid Q2 Results and Announces CEO Succession by John Forrester

Fee revenue has fully recovered to beyond prepandemic levels, as the company reported second-quarter fee revenue of $1.6 billion, a 34% increase year over year and a 3% increase from the second quarter of 2019. Adjusted EBITDA also came in strong for the current quarter at $220 million, 26% higher than the second quarter of 2019. 

Adjusted EBITDA margin calculated on a fee-revenue basis was 13.5%, significantly higher than the 10.2% reported in 2020 and 11.1% in 2019. The adjusted EBITDA growth and margin expansion reflect the impact of strong brokerage activity and permanent cost reduction actions, which management believes amounted to around $30 million in the current quarter and will reach $125 million in annualized permanent cost savings.

The company announced that John Forrester, who is the current global president, will succeed Brett White as the new CEO of the company effective Jan. 1, 2022. White will remain executive chairman after the transition and continue to lead strategy, mergers and acquisitions, and succession planning, alongside Forrester. 

The brokerage segment of the company displayed excellent recovery in the current quarter compared with the second quarter of 2020, when the pandemic suppressed business around the world. Capital markets revenue more than doubled in the current quarter on a year-over-year basis and was 17% higher than the second quarter of 2019. Leasing revenue was 67% higher in the current quarter compared with last year, but it remains 9% below 2019 levels.

Management Anticipates Revenue Growth

The valuation and other segment remains a bright spot for the company as fee revenue came in 16% higher in the quarter on a year-over year basis. The property, facility, and project management segment, which has been resilient throughout the pandemic, reported a 7% year-over-year increase in fee revenue. Management anticipates revenue growth in midteens for the full year as brokerage revenue growth is expected to be up more than 30% and the nonbrokerage segment is expected to grow in midsingle digits. Management said it expects adjusted EBITDA margins for the full year to be well above 2020 levels and will approach 2019 levels, which equates to an adjusted EBITDA range of $660 million-$710 million for full-year 2021.

Company Profile 

Cushman & Wakefield is the third largest commercial real estate services firm in the world with a global headquarters in Chicago. The firm provides various real estate-related services to owners, occupiers and investors. These include brokerage services for leasing and capital markets sales, as well as advisory services such valuation, project management, and facilities management.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Novartis AG(NOVN)

  • Recent and upcoming divestments will streamline the business and provide increased focus to deliver shareholder returns. 
  • Recent product launches indicate solid sales momentum, with near-term product pipeline potentially providing further upside.  
  • Selective bolt-on acquisitions to supplement organic growth. 
  • Operating efficiency focuses to further support earnings growth.
  • As the new management team improves Company culture, investors are less likely to ascribe a discount to the stock based on legacy issues.  

Key Risks

We see the following key risks to investment thesis:

  • Recently launched products fail to deliver sales growth as expected by the market.
  • New product pipeline fails to yield “blockbuster” products or delays in bringing key products to market.
  • R&D programs do not yield new long-term ideas.
  • Increased competition (pricing pressure & innovative products) from new entrants or existing players.  
  • Value destructive M&A.
  • Regulatory / litigation risks.

Management’s outlook

Assuming a continuation of the return to normal global healthcare systems including prescription dynamics particularly oncology in 2H21, and that no Gilenya and Sandostatin LAR generics enter in FY21 in the US, management anticipates (in cc); (1) FY21 net sales to grow low to mid-single digit, with Innovative Medicines to grow mid-single digit and Sandoz to decline low to mid-single digit, and core operating income to grow mid-single digit (ahead of sales), with Innovative Medicines growing mid to high-single digit, ahead of sales, and Sandoz declining low to mid-teens. (2) 2H21 net sales growth to accelerate from 3% in 1H21 to mid-single digit, as the Company continues to return to normal prescribing behaviors, as well as further Sandoz stabilization, and core operating income growth to be high-single digit, driven by higher sales and ongoing productivity programs partly offset by increased investments in growth drivers and pipeline.

Company Description  

Novartis AG (NOVN) is an innovative healthcare company headquartered in Basel, Switzerland, with approximately 125,000 employees. In 2017, the Group reported net sales of US$49.1bn, while R&D throughout the Group amounted to approximately US$9.0bn. The Company sells its products in approximately 155 countries. The group has two segments which it reports on: (1) Innovative Medicines (Oncology / Pharmaceutical), and (2) Sandoz generics division.    

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Grainger recovered its stronger sales growth but margin constraints have emerged in 2021.

investment stockbroker risk analysis using multiple devices. Financial analysis using phone app and laptop. Market trading profit.

The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. 

As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 287 in 2020 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. 

To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019). Grainger continues to expand its endless assortment strategy, but we’re skeptical of the margin expansion opportunity for this business, given strong competition in the space from the likes of Amazon Business and others. 

Financial Strength

As of the second quarter of 2021, Grainger had $2.4 billion of debt outstanding, which net of $547 million of cash represents a leverage ratio of less than 1.1 times our 2021 EBITDA estimate. Grainger’s outstanding debt consists of $500 million of 1.85% senior notes due in 2025, $1 billion of 4.6% senior notes due in 2045, $400 million of 3.75% senior notes due in 2046, and $400 million of 4.2% senior notes due in 2047. Grainger has a proven ability to generate free cash flow throughout the cycle. Indeed, it has generated positive free cash flow every year since 2000, and its free cash flow generation tends to spike during downturns because of reduced working capital requirements. Given the firm’s reasonable use of leverage and consistent free cash flow generation, we believe Grainger’s financial health is satisfactory.

Bull Says

  • With a more sensible, transparent pricing model, Grainger should continue to gain share with existing customers and win higher-margin midsize accounts.
  • As a large distributor with national scale and inventory management services, Grainger is well positioned to take share from smaller regional and local distributors as customers consolidate their MRO spending.
  • Grainger operates a shareholder-friendly capital allocation strategy; it has increased its dividend for 49 consecutive years and has reduced its diluted average share count by over 40% over the last 20 years.

Company Profile

W.W. Grainger (NYSE: GWW) distributes 1.5 million of maintenance, repair, and operating products that are sourced from over 4,500 suppliers. The company serves approximately 5 million customers through its online and electronic purchasing platforms, vending machines, catalog distribution, and network of over 400 global branches. In recent years, Grainger has invested in its e-commerce capabilities and is the 11th-largest e-retailer in North America.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Federal Realty Outperforms Our Expectations and Raises both 2021 and 2022 Guidance in Q2

 Re-leasing spreads continue to be strong despite the pandemic, seeing rents on leases signed during the quarter increase 7.5% with leases to new tenants up 10.2% over the prior rent. Second quarter rent collection improved to 94% compared with 90% in the first quarter and improved to 98% compared with 96% if rent abatement and rent deferral agreements are included. Improving rent collection drove same-store net operating income growth of 39.4% in the quarter, ahead of our 28.1% estimate in the second quarter. 

As a result, funds from operations came in at $1.41 for the quarter, above of our estimate of $1.25 in the quarter and well above the $0.77 figure reported in the second quarter of 2020 but still below the $1.60 level reported in the second quarter of 2019. The strong second-quarter results led to management significantly increasing its FFO guidance. Management raised its 2021 FFO guidance by $0.49 at the midpoint to a new range of $5.05-$5.15, which is slightly ahead of our current $5.02.

Additionally, management also raised their guidance for 2022 FFO by 25 cents at the midpoint to a new range of $5.30-$5.50. While the increase is encouraging, the updated range is still below our current $5.96 estimate for 2022. However, REITs rarely give FFO guidance for the next year this far out and, given the high level of uncertainty that still exists in retail, we suspect that management is being conservative with its 2022 estimates.

Company Profile 

Federal Realty Investment Trust is a shopping center-focused retail real estate investment trust that owns high-quality properties in eight of the largest metropolitan markets. Its portfolio includes an interest in 101 properties, which includes 23.4 million square feet of retail space and over 2,600 multifamily units. Federal’s retail portfolio includes grocery-anchored centers, superregional centers, power centers, and mixed-use urban centers. Federal Realty has focused on owning assets in highly desirable areas with significant growth, and as a result, the average population density and average median household income are higher for its portfolio than for any other retail REIT.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Taiwan Semiconductor Manufacturing Co.( TSMC)

JAPÓN BOLSA:KMA06. TOKIO (JAPÓN), 03/01/2018.- Un grupo de mujeres usan kimono durante la ceremonia de apertura de la Bolsa de Tokio de Japan Exchange Group, Inc. de la primera sesión comercial de Año Nuevo en 2018 en la Bolsa de Tokio, en Tokio, (Japón) hoy, jueves 4 de enero de 2018. EFE/KIMIMASA MAYAMA
  • Market leading position and room for further consolidation. TSMC’s significant expenditure on R&D should help it maintain this leadership position.
  • TSMC is leading the race in developing the new age of semiconductor chips such as Logic Technology, with thinner wafers being developed every year.
  • High barriers to entry – significant level of capital and know-how required to start a semiconductor business.
  • Independent and pure-play focus on manufacturing without marketing or branding of product eliminates conflict of interest with customers.

Key Risks

We identify the following key risks to investment thesis:

  • Moderating global economic growth, especially in the U.S. and China.
  • Trade tensions between the U.S. and China.
  • Operational risks such as suboptimal manufacturing quality of products e.g. Fab14B photo incident.
  • Softening smartphone sales and production. There may be a time-lag before the layout of 5G and AI materialize into sales for TSMC, e.g. regulatory restrictions.
  • Increasing commodity prices and difficulty for TSMC to improve margins. 
  • Unfavorable exchange rate movements between NT$ and currencies used in transactions (however, TSMC utilizes hedging strategies to manage this risk).

Management Outlook:

Forecasting strong demand for industry-leading 5nm and 7nm technologies, driven by all four growth platforms (smartphone, HPC, IoT and Automotive-related applications), anticipating 3Q21 revenue of US$14.6-14.9bn, and gross profit margin of 49.5-51.5% and operating profit margin of 38.5-40.5% (based on the exchange rate assumption of 1 US dollar to 27.9 NT dollars). Mr. C. C. Wei (CEO) noted, “For FY21, we now forecast the overall semiconductor market excluding memory to grow about 17%, while foundry industry growth is forecast to be about 20%, and remain confident we can outperform the foundry revenue growth and grow above 20% in 2021 in US$…we now expect our long-term revenue CAGR from 2020 to 2025 to be near the high end of our 10-15% CAGR range in US$…however, in the near term, we continue to observe both short-term imbalances in the supply chain driven by the need to ensure supply security as well as a structural increase in long-term demand, and while the short-term imbalance may or may not persist, we expect our capacity to remain tied throughout the year and into 2022, fuelled by strong demand for our industry-leading advanced and special technologies.”

Company Description  

Taiwan Semiconductor Manufacturing Company Limited (TSMC), together with its subsidiaries, engages in manufacturing, selling, packaging, testing, and computer-aided design of integrated circuits and other semiconductor devices. Based in Taiwan, the company manufactures masks and electronic spare parts; researches, develops, designs, manufactures, sells, packages, and tests colour filters; and offers customer and engineering support services. TSMC is the largest semiconductor manufacturing foundry in the world.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Wide-Moat MercadoLibre Continued to Ride latin America’s E-Commerce Wave in Q2

Mercado Libre reported 94% revenue growth in the quarter, well above the 66% Factset consensus estimate. This result was impressive considering it faced unfavorable currency movement (currency-neutral revenue rose 103%) and last year’s 61% growth at the beginning of the pandemic.

 In its commerce business, the firm recorded gross merchandise value and items sold growth of 39% (46% currency-neutral) and 37%, respectively, above our full-year estimates of 35% growth for both. In fintech, total payment volume soared 72% against our 53% full-year forecast. Thus, while the comparisons will get more difficult in upcoming quarters, we now think the firm is likely to eclipse our 58% revenue forecast for the year.

Indeed, its operating expenses increased 79% from last year on ongoing investments in fulfillment and delivery speed, marketing, customer acquisition, and loyalty. Even so, MercadoLibre recorded a second-quarter operating margin of 9.8%, well above our full-year 3.6% estimate.

Company Profile 

Founded in 1999, MercadoLibre’s commerce segment (representing 64% of net revenue in 2020) includes online marketplaces in more than a dozen Latin American countries, display and paid search advertising capabilities (MercadoClics), online store management services (MercadoShops), and third-party logistics solutions (MercadoEnvios). Its fintech segment includes an online/offline payment-processing platform (MercadoPago), mobile wallet platform, credit solutions for buyers/sellers, and asset management offerings (Mercado Fondo). The company derives more than 95% of its revenue from Brazil, Argentina, and Mexico.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Jacobs Engineering Group Inc. (NYSE: J) after Strong Fiscal Q3 Raises FVE. To $141

Checking Stock market data information graph on screen

he fair value increase reflects the firm’s outperformance, an improved near-term outlook, and time value of money, partially offset by the implementation of a probability weighted change in the U.S. statutory tax rate in our model.

Jacobs’ net revenue was up 10.6% from the prior-year period. Critical mission solutions increased its revenue 0.6% year over year. People & places solutions net revenue grew 1.4%. Lastly, PA Consulting delivered stellar 36% year-over year revenue growth. The firm’s adjusted operating margin expanded by 170 basis points from the prior-year period, with improvement across all business lines.

Management increased its outlook for full-year fiscal 2021 and now expects adjusted EBITDA in the range of $1,210- $1,275 million (up from $1,200-$1,270 million) and adjusted EPS in the range of $6.15-$6.35 (up from $6.00-$6.30). Furthermore, management is optimistic that the company can deliver double-digit adjusted EBITDA growth over the medium term. 

Company’s Future Outlook

We believe the company is poised to capitalize on multiple favorable secular drivers, including infrastructure modernization, space exploration, intelligence analytics, energy transition, supply chain investments (particularly in the semiconductor and life sciences end markets), and the 5G build out. We also think Jacobs is well-positioned to benefit from a likely infrastructure plan in the U.S., given the firm’s strong position in areas such as water and transportation infrastructure.

Company Profile

Jacobs Engineering Group Inc. (NYSE: J) is a global provider of engineering, design, procurement, construction, and maintenance services as well as cyber engineering and security solutions. The firm serves industrial, commercial, and government clients in a wide variety of sectors including water, transportation, healthcare, technology, and chemicals. Jacobs Engineering employs approximately 55,000 workers. The company generated $13.6 billion in revenue and $970 million in adjusted operating income in fiscal 2020.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.